The Future of Private Renting: Shaping a fairer market for tenants and taxpayers

Daniel Bentley, January 2015

The private rented sector, which has undergone a remarkable renaissance over the past two decades, is becoming increasingly central to considerations about the housing market and the benefits system. Four million homes are now privately rented in England, accounting for 18 per cent of all households. The sector has doubled in size since 1989 and contains more households now than social housing. Owner-occupation is in decline.

This trend has been accompanied by another, directly related, development: the rapid rise in the housing benefit bill, which has more than trebled in real terms over the same period and is now in excess of £24 billion across the UK. Within that, the amount claimed by those renting from private landlords (as opposed to local authorities or housing associations) has also shot up, more than doubling over the past decade to £9.5 billion. It is expected to top £10 billion by 2019. A quarter of private tenants now claim housing benefit to help meet the rent.

These sums reflect the worsening affordability of private rented accommodation which growing numbers of people have no choice but to use, owing to the decline in social housing and barriers to home ownership. As well as the cost of renting, another issue that has come to the fore with the increasing reliance on private landlords has been the lack of security offered to tenants who want long-term stability, particularly those with children.

There is no solution to the current housing crisis that does not involve a dramatic increase in the construction of new homes, including in the social sector. But that does not mean that nothing can be done to alleviate some of the associated problems until such time, if it ever comes, that scarcity ceases to be a defining characteristic of the housing market. Because even in the best case scenario, over the coming years house building is only slowly going to catch up with demand, if it ever does, so the cooling effect that should have on prices is some years hence. In London, moreover, it is quite conceivable that supply will never match demand, such are the space limitations and the seemingly limitless allure of the capital to newcomers and investors from around the world.

So this paper does not seek to provide a solution to the housing crisis in its entirety but to study those measures designed to provide a safety net for lower-income households in particular while there is a shortage of affordable property. There will always be a proportion of households at the bottom of the income scale who require state support to keep a roof over their heads. That safety net is essential in any civilised society. The question is how best to provide it. The proposal offered here is intended to start a process in which demand subsidies in the form of housing benefit, currently growing in size and influence in the housing market, are gradually scaled back. It attempts to address together the issues outlined above through a system of indefinite leases and rent ceilings within (but not between) tenancies.

Any attempts to interfere in market prices arouses suspicion, and justifiably so. However, it is the argument of this paper (set out in Chapter 3) that private sector rents are already distorted – upwards – by a system of subsidies that places a floor under prices, at least at the lower end of the price spectrum. This in turn increases the numbers of lower-income households forced to rely on it, further inflating rents. In the context of this vicious circle a system of rent regulation would be justified, to curb further inflation in the cost of private renting and so limit the numbers of additional people dragged into housing benefit dependency.

Critics argue that any form of price regulation will make the present situation worse by reducing investment in the private rented sector and reducing the supply of homes. It is said that the sector must be supported to grow to accommodate the increasing numbers of people shut out of the housing market. However, the rapid expansion of the private rented sector has not led to any significant growth in the number of homes available; it has been achieved at the expense of the owner-occupied and social sectors, which have been shrinking. As a result, the private rented sector has contributed to much of the demand it purports to meet (see Chapter 2). It is supported in this by a housing benefit regime which provides a financial safety net for landlords as much as for tenants.

It should not be assumed, in any case, that modest restrictions on rent rises will create an exodus of investors from the private rented sector. Many of those investors have bought homes to let in pursuit of capital gains as much as rental yields. House prices are expected to continue rising, so that incentive will remain on offer, probably until the shortage of new constructions is finally dealt with – if it ever is. Those who point to the decline of the private rented sector prior to deregulation in the late 1980s should consider the many other factors that drove landlords out of the market over the course of the twentieth century. Government policies to expand owner-occupation and the provision of municipal housing were at least as important in that decline, and encompassed much more than just rent controls (see Chapter 4). The lesson from those years, and from the experiences of other nations with much larger private rented sectors than the UK, is that the health of the sector is determined by a wide range of economic conditions and government actions that inevitably includes, but is not limited to, the regulatory framework. Given that the UK currently has one of the most liberal regimes internationally for private landlords, policymakers should consider the wider investment environment more carefully before dismissing the scope for indefinite tenancies and rent regulation. It should also seek where possible to ensure that the private rented sector, if it is to expand further (as seems inevitable), plays a bigger role in supporting the building of new homes.

The longstanding policy of subsidising demand rather than supply – dating largely from the 1980s where rent controls were abolished, too – has led to many of the problems afflicting housing provision in the UK today. It should be the goal of government to reverse this balance, in time. One of the first steps must be to curb future increases in private sector rent, so that fewer people come to rely on housing benefit and so that those who do need less of it. This paper explores how we might do that without the disruption that is engendered by merely cutting and capping housing benefit payments. Only by gradually reducing the influence of housing benefit can we achieve a fair market in housing – a market that promotes supply rather than choking it off, and forces landlords to compete on price and quality rather than too often taking desperate tenants for granted.